Favorable shifts in loan loss reserves helped fuel a jump in Freddie Mac's net income to a high not seen in years as it nearly matched its opponent in efforts to purchase home mortgages from private companies.

Freddie generated $3.8 billion worth of earnings that were up 60% from the same period a year earlier and compared to $3.6 billion in the first quarter. It also generated $6 billion in net revenues, beating S&P Capital IQ's consensus estimate of $5.4 billion. The company acquired $110 billion in single-family loans during the second quarter, which came close to matching competitor Fannie Mae's at $111 billion.

The nearly-equal single-family acquisition numbers point to increased government-sponsored enterprise competition for loans that may benefit some lenders and servicers, but has reportedly challenged larger players who are buyers.

"We are continuously improving our systems and policies to bring loans in the door in all economic environments while maintaining a bedrock commitment to risk management," Chief Financial Officer Jim Whitlinger said. "This applies to big, highly visible changes, like the introduction of new credit scoring models. And it applies to smaller, incremental changes to reduce our risks, such as moving servicers to near real-time default reporting."

The total average fee the enterprises change lenders to guarantee mortgages was up slightly in the quarter at 0.1 basis points but it came from a hike on the multifamily side of the business, analysts at BTIG noted in a report. Single-family g-fees remained flat.

Earnings drivers and details

Freddie's total benefit for credit losses during the period was $880 million, which compared with a $783 million expense in that area a year earlier.

The benefit came primarily from the single-family segment and resulted from a change in Freddie's process for projecting housing values, in addition to a shift in actual home prices. Freddie reported a 0.7% gain during the period, compared with a 0.2% decrease a year earlier.

Freddie's serious delinquency rate for single-family loans was 0.60%, matching the first quarter and up from 0.55% a year earlier. Its multifamily equivalent was 0.51%, up from 0.43% in the first quarter and 0.47% a year ago.

The government-sponsored enterprise also reported that its net worth climbed from $74 billion at the end of the first quarter to $78 billion.

Legacy investors are watching capital measures like net worth closely at Fannie and Freddie because these metrics are closely linked with prospects for removing the two GSEs from a conservatorship they've been in since a financial crisis in 2008.

Whitlinger said Freddie is working to close the gap between where its current capital stands and where it needs to be.

"We are making progress reducing our capital deficit, which has come down $41 billion since the end of 2022. Excluding buffers, our capital shortfall was $101 billion at the end of the second quarter," he said.

The process is complicated by the fact that the government's $73 billion senior preferred stock position in the GSEs from the 2008 financial crisis' bailout doesn't count toward capital, he noted.

Fannie and Freddie are currently held in conservatorship arrangements that restrict investor access to their earnings; but Trump administration officials, including the GSEs' oversight chief, have considered doing more to court private investor involvement to monetize the enterprises.

Doing this could bring new investors to the table and potentially improve the trading value of the shares but it also would create dilution risk for legacy stockholders, Keefe, Bruyette & Woods analysts noted in a report.

Researchers at KBW also noted that Jonathan McKernan, former domestic undersecretary for finance at Treasury, stepped down and could be significant in that he has been identified as a potential point person in efforts to recapitalize and release the enterprises.

Freddie's stock was up 0.90% on the trading day late Thursday morning at $5.59 per share.